Trading Tips

A rookie trader’s plan


A while back, Mark Wolfinger (a contributor to Trading FAQs) was asked by a rookie trader to comment on his trading objectives and plan. Basically, this newbie had set himself the nominal goal of making $2ooo/mo from the market trading options. At first appearance, an objective like that is nothing new, especially for those who have it in mind to reach the point where they can trade for a living. As the following question quickly made clear, however, this was a person with zero trading experience.

“Should trading be limited to strictly paper trading or is there an advantage to trading very small sizes with real money?”

I’ve already shared my views on demo vs. live trading before, so I won’t tackle that subject again here. Instead, I’ll piggyback on some of what Mark has to say in his post.

Firstly, he talks about the importance in considering what the $2000/mo objective is relative to one’s capital. As he notes, if your account is $20k then you’re talking a 10%/mo return, which is quite ambitious to say the least. And looking at things from the other side, if you’ve got $1mm then such a small objective is hardly worth the effort. You can make more with very simple investments.

The big thing in all this, though, is that if you’re a beginning trader you shouldn’t be thinking about anything above and beyond getting first to being a break-even trader. You’re going to make a whole bunch of mistakes that will cost you money. Consider that a given and you won’t be disappointed.

Once you’ve worked your way through that phase you can start focus on making any kind of consistent positive return – over whatever time frame is relevant to you. Having achieved that, you can then start scaling things up and begin to think about profit targets.

Personally, I’m not a profit target type of trader. But then I don’t trade for a living and have no desire to do so. For others, it’s a bigger consideration because they need the money to pay the bills.

Mark offers up some other good new trader advice, so definitely give his post a read.

Trading Tips

The Down Side of Day Trading

I’ve written on several occasions about the considerations involved in trading for a living and trading full-time. Most of what I talked about in those pieces was the financial and performance aspects of it all. James Altucher, though, looks at things from the other side of the equation in his post 8 Reasons Not to Day Trade. Here’s the list.

Altucher suggests that most day traders will suffer a bad patch that will make them suicidal. While things may not be quite that bad, the psychological impact of poor performance can definitely be destabilizing.

I actually see this as one side of a two-sided coin. The other side is not getting enough exercise, which tends to be more my problem. Sitting at a desk for hours on end is definitely not conducive to keeping a narrow waistline.

I can speak from experience here. Staring at charts all day definitely does my eyes no good and can sometimes lead to major eye fatigue. I do try to set up my desk configuration to the least stressful setting possible, but the hours still add up.

No Social Life
This one is a bit of a mixed bag. Sometimes trading war stories can improve your social life. Altucher’s point, though, is that you’re so focused on the markets that you really don’t want the distraction.

Blood Pressure
We all know how stressful trading can be. Add in a poor diet, a lack of exercise, and not getting out into the world of real people and you definitely start ticking those check boxes for risks of a heart attack.

Let’s face it. Trading can be very financially rewarding, but it’s not very productive in the grand scheme of things. Traders face this question all the time. Michael Lewis talked about it in his book Liar’s Poker. (If you haven’t read that one, by the way, I strongly recommend it.)

No Career
Day trading is very unlikely to be beneficial to any sort of career you may want when you decide you can’t take it anymore. Networking is limited since you have no social life or co-workers (although Currensee certainly alters that equation!). You don’t develop any marketable skills or have any demonstrable achievements you can list on a resume.

It’s Impossible
The odds of being a successful long-term day trader are very, very low. The burn-out rate is high for exactly the reasons mentioned above. This is true for institutional traders just as much as individual ones. You just don’t see that many “old” full-time traders.

Now, of course, trading for a living doesn’t necessarily mean trading full-time. I’d contend that it’s better if it isn’t. Certainly, there are those who are well suited to the full-time gig. I can think of a guy I worked with who’s just a natural, but he also has a lot of outside interests to keep things fresh for him. He’s not all markets all the time. The point is, don’t feel like you have to dedicate all your waking hours to the markets. You don’t, and if you try to there are consequences.

Reader Questions Answered

Is Trading for a Living Worthwhile?

Here is a very good inquiry I received from a trader named Yvan in Bern over the weekend regarding a post I did about trading for a living.

I’ve just read the article What’s the secret to making a living from internet based Forex? where you mentioned that if you want to make 2500 per month you need 100,000.

In that case i think it isn’t worthwhile, i live in Switzerland and my cleaner earns more than that net salary, she doesn’t even risk 1k and definitely not 100K, and probably spends a lot less time working than a trader to make this kind of return.

So my question is, can someone who is not a professional trader can really make a good living from trading, and i don’t mean 2500 but more like 10k/month? I read a lot that new traders aren’t realistic. Is that because if they were it wouldn’t be worth their time? Maybe that could explain why so many people sell stuff related to trading because that how they make their money and not from trading. Could it be like the gold rush in America where just a few guys became rich from finding gold but the ones selling pics and shovels were the ones becoming quickly rich.

I’ve spent the last few months trying to make money from trading Forex, but is it a really a good business to get in?

Trading for a living is something a great many new traders have as their objective (myself included once upon a time), but only a very small fraction ever accomplish. This is partly a reflection of difficulty, of course, as just being a long-term profitable trader is a challenge. It is also partly a reflection of financial needs and changing personal situations.

I do firmly believe that to have a realistic chance to successfully trade for a living over the long-term you need to be very well capitalized. You don’t want to have to make 20% per month (for example) just to cover your living expenses, never mind to grow your account over time.

Trading for a living is a lot like starting a business. It requires a high degree of knowledge and experience in the chosen field, sufficient capital to be able to produce reasonable income and some cushion against difficult times, and a bit of luck and perserverance as well. There are a lot of reasons why new businesses fail at a very high rate, just as there are a lot of reasons why new traders fail at a very high rate. And even beyond that, those that succeed don’t guarantee massive financial benefit.

Yvan asks the very legitimate question whether purusing trading for a living is worth it? In the end each trader has to make their own decision, but for the vast majority of folks the answer is likely going to be not. In my case the answer is definitely negative. For me trading and investing is about growing wealth. While I may reach a point some day where my market activities produce sufficient income to suit my needs, I do not have any plans to shift to specifically focusing on trading as my profession. Consider it my personal diversification plan – which is also why I will never hold any meaningful portion of my capital in my employer’s stock.

As to Yvan’s point about trading educators, etc. being like the pick sellers during the California gold rush, there is some truth to that. Not that we need to view it in a negative light. People need to learn about trading and the markets just like prospectors needed tools. Many trading educators use income from their work to diversify their income, which is not an unreasonable thing to do given the fickleness of the markets.

Reader Questions Answered Trading Tips

An Emailer Struggling to Trade for a Living

I received the following email from a trader struggling with trading for a living.

Ho John,

If possible I would like you ask you for a few questions. I’m sitting on futures USD/GBP. Trying to trade for living. The main problem now is that I have again big drawdown during that week. The same I had during first week of March contract. All the week I had very bad results, which caused me to think that my strategy is not working. Well I took 1 month to re-shape strategy and make it better. Then I’ve returned to trading step by step I had small profits and again gained trust to new updated strategy. Now again the whole week during which I can not understand anything. It seems that that first week of new contract is not “tradable”. Is it correct ?

The second question can you advise what software could be used to test strategy ? apart from manual testing. Unfortunately now I can afford to myself only free software if you know such and can advise.

Sorry for writing that message, but I have not a lot of time left to start trade normally as all my financial recourses are coming to the end and I do not have another way other, but to trade.

Thank you in advance for your kind support, Kind regards, Andrew

To answer Andrew’s first question, I know of nothing in regards to the first week of a new futures contract which would make it any more or less tradable than any other time. There is, of course, the mechanics of folks rolling over from one contract to the next, but that’s a minor thing.

As for the second question, I don’t know of any free system testing packages. I personally use a combination of MetaStock and Excel. If you have the skills, system testing in a spreadsheet is a good way to go as it can be extremely flexible and you can easily drill down into the results. Readers of this post are welcome to make suggestions if they have any.

Now for addressing the larger issue I think Andrew has here. My guess is that he is under-capitalized to trade for a living. If he cannot afford to pay for a good software package for system testing he’s almost certainly doesn’t have enough money to trade for a living with any likelihood of success.

At the same time, the lack of a solid system is a major problem for Andrew. He should have had one well tested both backwards and forwards before even considering trading for a living. You absolutely do not want to start trading for a living without one.

As a last suggestion, I would strongly advise Andrew to get a job and make a living that way for a while. Being an inexperienced trader – as he clearly is – and having to produce profits to live on is a recipe for disaster. The stress is enormous and tends to lead to very bad things happening. I realize this is probably no what Andrew and others in his situation want to hear, but I would be remiss if I didn’t point out that their chances for success in such a situation are extremely low.

Reader Questions Answered

Supporting Yourself Through Trading

The other day I found the following in my email inbox:

I have only managed half the Essentials of Futures Trading… so far. But it’s refreshing to get real info for nothing… rather than promises and hype..many thanks…I am doing a really worthwhile job right now.. helping disabled people……but it pays peanuts!.. I’m on HALF what i was 10 years ago. I would rather do a couple of days a week as a volunteer here if I can support myself through trading.. Maybe you are my key..?

I always get a bit nervous when someone starts talking about going from ground zero to trading for a living. That seems to be what this trader has in mind.

Trading for a living has two major requirements. They are the ability to generate consistent profits from the market and sufficient trading capital to generate enough income to more than meet your living expense needs.

It is a very, very small minority of traders who trading for a living using their own capital. Keep in mind that professional traders generally are trading someone else’s money, not their own.

Trading for a living is the dream of a great many folks when they get into the markets. It’s that idea of not having a boss, of being completely independent. I’m not saying it isn’t a great dream. I’m all for independence and pursuing your desires. There needs to be a large does of reality inserted here, though.

First of all, getting to the point where you can rely on your trading to generate consistent income isn’t something which happens overnight. It can take a considerable amount of time, depending on many different factors. In some cases that can literally mean years (if at all), though for someone with the ability to dedicate a lot of focused time to it the process will generally go faster. During this period losses will be taken. It’s basically a lock. That means you need an alternate source of income or a sufficiently large stake to absorb your living needs.

Secondly, even if you are a consistent performer, your chance of trading for a living successfully from a small starting stake are incredibly small. Let’s assume for a second that you need to make $5000/mo from your trading to cover all your living expenses, plus taxes, plus health insurance, and all that stuff your employer normally covers, as well as to have some extra for savings. If you are able to consistently make 10% (a very aggressive long-term rate of return) then you need at least $50,000 in your trading account to make the requisite income. Really you should probably double that to account for dips in performance, taking time off, etc.

On top of all this, trading for a living can be a very lonely thing – depending on how you do it. A lot of dedicated traders complain about that. It’s not for everyone.

I’m not trying to throw a wet blanket on things here – just trying to keep people from pinning their hopes on very low probability developments. Part of being an educator is teaching people what they can expect along the way.

Reader Questions Answered

What’s the secret to making a living from internet based forex trading?

I recently saw the question “What is the secrets of making a living from internet based forex trading?” posted on LinkedIn. In reading through some of the responses left by members of the site (as I am) I couldn’t help but be a bit annoyed at some of what people were saying – mostly from a negative perspective. A lot of it was just pure ignorance shining through.

But, let me provide a very simple answer to the question asked. Really, the answer is the same to trading for a living in any market. It takes sufficient capitalization and consistent application of a proven strategy.

In terms of capitalization, you need enough to make the type of monthly returns you require (living expenses, taxes, etc.) reasonably achievable. Even better, make them easily achievable. The person asking the question on LinkedIn mentioned $2500. Personally, I would be thinking $100,000 for a minimum account to achieve that kind of performance. That’s only a 2.5% per month return, which is not pushing things and allows for portfolio growth in those months where higher returns are achieved, but if you have a method that consistently produces a higher rate of return you can get away with a lower capital base.

I wouldn’t want to be in a position where I had to make 10% per month to meet my bills. That’s a very aggressive annual rate of return by most measures, which means you don’t leave yourself much room to grow your account, which personally would be a parallel objective of mine. After all, if you’re not growing your account you probably won’t keep your trading income up with a rising cost of living.

In short, no you probably will not be successful trying to trade for a living with a starting account of $5000. I know the allure of not having a job is there, but try to be realistic.

As for the consistent application of a proven strategy is concerned, that’s pretty self-explanatory. Of course saying you will do that and actually doing it are two entirely different things. There’s no way I can get into all that here. Refer to my posts on creating your trading plan and developing trading systems for further discussion.

Deep Posts Reader Questions Answered

Can I make X each day/week/month in the markets?

I received the following question yesterday:

I am looking for a way to make small amounts of money (about £100) per week regularly and relatively risk free.

Am I under the misconception that, the bigger the amount of money “people want” the more risk they take, (I suppose the more chance of the trade going the wrong way), and thereby, if I only go for small amount (as below) the risk will be less (because I would not be in the trade to long (or have I gotten it totally wrong).

As I only want to make relativley small amounts (£20.00 per day = £400 per month) is this relativley risk free and easy (or easier) to achieve. (what kind of financial commitment would this plan need, could it be done with a £250 stake, £400, £1000 ?).

This is a slight variation on a question that frequently gets ask by new traders. It really needs to be addressed in percentage terms. In that regard the query of the last paragraph would get changed to something like:

Could I make 40%, 100%, 160% per month? (using the £400/mo and reversing the stake figures order)

Now, in those terms it’s a bit easier to grasp the complexity of the issue, especially when we introduce the idea of risk in to the equation. How likely are we to be able to make 40% (nevermind the higher figures) per month “relatively risk free”? I would say not very likely at all. Returns of that size imply a higher than average risk level.

But let’s back up to a more general question. Is it possible to make 40% or more per month? Sure. There are no doubt traders out there making those kinds of returns. They are most definitely in the minority, though, and even among folks who consider themselves successful traders or investors returns like that would be judged extraordinary.

The point I try to make in my book and in all of my educational efforts is that each individual needs to determine what success in the markets means to them and match it up with their own personal risk tolerance. That is the core of any realistic trading approach and the foundation of finding the best method for her or him to take on the markets.